Grants for banks, loans with interest for the poor

The row over New Labour’s ‘plan’, allowing credit unions to charge 12.68% – 26.8% APR on what are essentially crisis loans, has been well highlighted by the press today. The main focus of their ire is on the unusually high interest rate, though no-one seems  to have really asked why people desperate enough to need crisis loans are having to pay interest at all.

The November consultation paper ‘The Social Fund: A New Approach‘ is not a suprising paper in New Labour terms, it is just another step in their plan to put as much of the social services as possible into the hands of the market. As per usual, once the cries went up about it being essentially a ‘loan shark’ plan, the government did its usual Yes Minister act of blaming it all on an ill-drafted paper—New Labour’s version of the old schoolboy trick of pointing in one direction and running in the other.

Cabinet minister John Hutton wheeled out a thin defence claiming that it wouldn’t “necessarily” mean poor people paying interest on loans, yet the paper clearly talks about interest being used to fund the operation, and it is really hot air from a windbag because the paper also clearly mentions deducting repayments:

There are risks associated with lending money to those who are hard pressed to manage on a small budget. To reduce these risks substantially, we would offer our external partners the facility of recovering any money lent under the proposed reform by deductions from their clients’ benefit payments. Over 90 % of social fund loans are recovered in this way. Moreover, unlike the Eligible Loans Deduction Scheme, credit unions would be able to use this facility as soon as the loan had been made, rather than waiting until the borrower defaulted on repayments.

Note that it worries about poor old credit unions and their ‘lending risks’. They ought to know that the financial sector loves lending to people who might default, slapping high-interest charges onto them and then sending the defaulter’s account to a bullying debt recovery agency. The only thing standing in their way here is the government with the eyes of the press and public watching its actions. The government will help avoid this potential loss of income for lenders by extracting repayments from the already pitiful amount of alms money they pay in  so-called benefits. It doesn’t seem to occur to them that perhaps if benefits weren’t as atrociously meagre as they are people might not need to apply for a plethora of loans and grants to replace cookers and beds.

John Hutton attempted the moral high ground with his riposte that it was the Conservative Party that turned the original grants into loans—empty words when the government is going even further and farming them out to the general incompetence of the market, which is not fit to be in charge of a social service. As the Morning Star editorial commented: Hutton didn’t have explanation as to why Labour, after eleven years of government hadn’t reinstated them as grants.

So the situation is now clear: The banks get millions of interest-free money, which they fail to recirculate into the credit economy, using it instead to buy out their failing competitors, whereas poor people get high interest loans. Another triumph for the Labour party in its game of top trumps with Thatcherism.

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